What to do? Monetary policy is frozen. Bernanke and company don't dare to cut rates now, for fear of spurring inflation. They're wrong -- the inflation isn't coming from inside the United States. Employees have no power to demand higher wages, and companies have no power to raise prices. Inflation is coming from outside the US. Demand from China and India is pushing up commodity prices. And the dollar is dropping, which makes everything we buy from abroad more expensive. The Fed is correct to worry about only one thing when it comes to cutting rates -- that investors will be even less enthusiastic about returns they can get in the U.S., and will move more of their money into euros, yen, and a basket of other currencies. This will drive the dollar down further and thereby push up the prices of much that we buy from abroad, spurring inflation. But the chain of cause-and-effect here is not so powerful or direct as to suggest that no rate cut is warranted now. The Fed should cut rates again. If we the economy gets moving again, and investors will flock back.
Next Reich pushes again for his capital projects as economic stimulant proposal,
Fiscal policy is a surer bet, but Congress -- especially the fiscally-conservative followers of Herbert Hoover called "blue-dog Democrats" -- is still hung up about budget deficits. Now is the time to exhume John Maynard Keynes and understand that government must be the spender of last resort when there's inadequate domestic demand. And the best and most urgent government spending now is for infrastructure -- especially public transit (see my postings below). Dems should move quickly.
I think that Reich's fiscal policy ideas are sound. I worry about his monetary response, further driving down the value of the dollar seems to me to be a move that is fraught with potential disaster by driving up costs further for the middle class. Reich is obviously a very smart man and I generally trust his instincts but I'm not convinced that the cause-effect relationship is as easily dismissed as he seems to think it is.